governance, political economy, institutional development and economic regulation

Posts tagged ‘Manmohan Singh’

Former Prime Minister Manmohan Singh, recently released a book titled India Transformed — 25 years of Economic Reform, edited by Rakesh Mohan, at the appropriately historic Nehru Memorial Library. After the obligatory photo-op, Dr Singh turned to finance minister Arun Jaitley and with a beatific smile, handed the book over to him, as if, symbolically, he was satisfied that he could hand over trusteeship of the economy, to the three-year-old NDA government, and walked off, disregarding the speech he was scheduled to deliver.

The reform baton passes on

It was indeed a poignant moment and well chosen, for the economic baton to be handed over. The high-decibel criticism by Left-oriented, liberal public intellectuals of the economic vacuity of the BJP government’s economic policies continues. But the fact is that we are now at a cusp, an inflexion point. In all likelihood, we shall do substantially better on inclusive growth. This may sound incredulous at a time when growth, industrial investment and exports have fallen from the earlier upward looking trend line. But a dip in the industrial investment and growth rate are natural short-term consequences of the BJP having finally walked the talk on corruption.

Pressing the economic accelerator is not enough

Over the first three years, the NDA merely pressed the accelerator harder on the positive legacy of the UPA — rural unemployment support, fast-forwarding Aadhar, digitisation of commerce and banking, financial inclusion, space technology competitiveness, making electricity surplus, making access to telecommunications even more affordable, better transport and urban infrastructure, disinvestment of minority shares of state-owned entities, ensuring fiscal stability and progressively higher financial devolution to sub-national governments, including local governments.

Burying past negativities is good but not enough

It also did very well to bury the negative legacy of the UPA. The biggest achievement is in fast forwarding of expenditure programmes without the viral outbreak of corruption scandals seen earlier. More positively a three-pronged action plan is in place to make public systems resilient to corruption.

GST – the corruption buster

First, getting the GST is the biggest legislative and operational achievement to dampen corruption and enhance value addition by integrating the national market. Glitches remain due to poor drafting of rules which burden the small, honest taxpayer. Many such are the obsessive dedication to maximising revenue, even at the expense of simplicity. As usual the pain is being most felt by those least able to bear it — ragpickers — at the bottom of the urban food chain – their daily income have halved because the “kabadis” (junk yards) they sell plastics and glass to, are playing safe on the likely new tax liabilities. Small individual consultants or homeowners, who live in one state but get work or rent from another, re similarly caught in a bewildering tax reporting spaghetti.

Bankruptcy & NPA resolution – The crony capitalism killer app

Second, is the frontal attack on crony capitalism — identifying the borrowers who have defaulted on Rs 12 trillion owed to banks, getting the Bankruptcy Act operational and signaling public sector banks that there will be no more “Mundra scam (1950s)” type telephone calls from the government. Reaffirming that sensible lending shall be rewarded and inept or corrupt lending punished.

Big brother must watch use smart analytics

Third, the proposed use of “big data”, including data from social media, to zoom in on potential tax evasion and crime. Taken together, these actions lay the systemic capacity for reducing corruption.

Aim for the sweet spot

Whilst perfecting its drive at real sector reforms, here are the four “tests” the government must pass.

Defang the trade Unions

First, the unleashing of genuine privatisation (offloading of majority shares in a state-owned entity) as proposed in the long-delayed case of Air India is the winner. It sends the signal that India is open to efficiency enhancing financial restructuring. That it intends to free up existing public capital to create new public goods — jobs, physical infrastructure, improved social services, like health and education, whilst fresh private capital gets infused into the commercially viable supply of private goods — air and rail travel, steel, metals, petroleum and electricity. The Labour Unions are up in arms. This is where privatisation flagged in 2003 under Minister Arun Jaitley and Prime Minister A.B.Vajpayee. Can the Modi-Jaitley team de-fang the inward looking, protectionist, labour “aristocracy” comprising the Trade Unions – the bedrock of the moribund CPI(M)?

Grow private banking rapidly

Second, financial sector restructuring to make state-owned banks commercially viable. Uday Kotak, of the Kotak Mahindra Bank, surely over-stretches when he advocates the wholesale exit of loss making public banks and their substitution by private banks. But clearly, the strategy of incremental privatisation, as done earlier to enhance telecom, aviation or electricity generation, will pressure state-owned banks to become competitive. This should also circumscribe the ability of the government to use banks like ATMs for populist goodies.

Nail large. serial loan defaulters as criminals

Third, the strong action proposed for making collusive default on bank loans a criminal act is commendable. It brandishes a big stick for potential defaulters. The intention is virtuous. But experience shows that criminals, especially rich ones, find it easier to evade the law than poor innocents. To avoid this perverse outcome, criminal powers should not be delegated outside the judiciary. The record of tax tribunals and quasi-judicial agencies is not sanguine enough to empower them with criminal powers in addition to their economic mandates.

There is no option except to reform the judiciary through incentives and structural changes in judicial governance. This is a tough nut to crack, but shortcuts will give rise to the miscarriage of justice, vigilantism, and massive public resentment — specially in the middle class, which will be the most impacted in cases related to property and small business.

Remain a classic, fiscal fundamentalist

Lastly, the finance minister’s determination to maintain macro-economic stability has been amply demonstrated. This resolve must not weaken even during the run up to the 2019 general election. This will be the biggest economic win,lo if achieved. The report of the N.K. Singh Fiscal Responsibility and Budget Management Committee 2017 embeds too much flexibility to provide credible guidance for the future. Fiscal fundamentalism is better.

Good politics must also be good economics. There is an appetite now amongst voters for hard reform. This, by itself, is a tribute to the credibility of the NDA government. A populist pre-election budget would be seen by the voters as an early admission of defeat. That is not the winner’s way.

Adapted from the author’s article in The Asian Age, August 9, 2017 http://www.asianage.com/opinion/columnists/090817/hard-reforms-vital-nda-needs-to-shun-populism.html

The Republican sweep of the mid-term Senate elections in the US closely resembles the Modi wave in India. In both cases, electoral disgust with wooly idealism and unfulfilled promises fueled the wave.

In the US, Janet Yellen, Chair of the Federal Reserve caused a stir on October 17 by labelling as “stagnant” the living standards of the “aam” American – a seeming indictment of the last seven years of Democrat rule. She next made already raised Democrat eyebrows, merge with the hair line, by citing the inheritance of wealth as a significant pool of economic opportunity.

Both statements are anathema for the Democrats for whom income inequality is only a necessary evil and inheritance of wealth, opposed to the American dream of making good on one’s own steam. Is Yellen playing to the Republicans?

If it was India, Yellen’s strategy would be viewed as a technocrat aligning to the tune of new masters. Party lines in India are androgynous, vague and fungible in any case. Political stances on specific issues are not nuanced. When horns are locked between parties, the driver is mostly to play “spoiler” rather than differences on technical or ideological grounds.

But for a dilution of “neo liberal” ideologies in the US, close to the heart of the Democrats since Bill Clinton initiated them, is a serious event signaling a never before ideological convergence between the Democrats- associated with “big government, social protection and wealth redistribution” -and the more “conservative, small government, pro-business” Republicans.

Such a workable convergence of ideologies is sorely needed in the US, where the Republican dominated House of Representatives and now the Senate can torpedo any chance of President Obama having a meaningful second term.

The American parable has lessons for India. The handsome mandate won by the Modi led BJP in May 2014 and again recently in the Maharashtra and Haryana state assembly elections has spawned acrimony and worse, between India’s two main national parties: the BJP and the Congress. Frankly this is uncalled for. In sharp contrast the ex-PM, Manmohan Singh, who is a Rajya Sabha MP, is setting a good example by regularly and positively contributing to issues across party lines in Parliamentary Committees. PM Modi and FM Jaitley seem to have established a working relationship with the technocratic, ex-PM. This augurs well for the substance of confabulations in the parliamentary committee on Finance. We hope the Modi Sarkar (government) will expand the opportunities for such positive collaboration across party lines, especially with technocratic talent.

Media reports suggest that the erstwhile Planning Commission will be reconfigured, in early 2015, into a forum for hands-on collaboration between state government and the Union. This is just what is required.

The Modi electoral wave is shrinking the number of non-BJP state governments rapidly. Maharshtra and Haryana are now with the BJP. Delhi, which is now on way to the polls, is likely to follow. As the electoral clout of the BJP grows, it will inevitably induce a push back from threatened regional and marginalised national parties.

The British successfully used the “safety valve” of participative deliberations for decades, to secure political harmony. Bleeding opposition parties by productively engaging their technocrats can not only meet the capacity challenge the BJP currently faces, but also restrain opposition parties from being “spoilers”.

As in the US, Indian voters have “hunkered down” and adopted a black and white perspective. The choices have shrunk to either a vote for nebulous concepts of pluralism; democracy; liberalism (Congress and its spin offs) or a vote for economic self-interest (BJP and select Regional Parties). Between the two options, clearly acting in one’s economic self-interest is winning.

The Modi Sarkar has a huge opportunity to tap into this narrowing of the voter expectations. Here are two steps which can play to their new expectations:

First, after wowing the young electorate with a media savvy, electronically charged campaign, the likes of which has never been seen in India, the Modi Sarkar cannot now tamely go back to the netherworld of the paper file bound by red tape.

Google, Microsoft and Apple can facilitate real time digital communication between government, business and citizens. But unless connectivity become pervasive; the quality of access improves and the cost of access is resonable, large swathes of our citizens remain excluded.

More importantly, what use is it for a citizen to record and report crime instantly, using a smartphone, if the response time of the police and medical teams runs into hours if not days? Unless government processes are digitized to seamlessly integrate digital inputs and establish electronic audit trails of action taken, vast pools of sloth and inefficiency will continue to confound citizen expectations.

We are not moving up the ladder of digitization of public systems and interface fast enough, thereby keeping transparency, accountability and participation levels very low. Can the PM set May 27, 2015-a year since assuming office- as the deadline after which all submissions to the PMO must be electronic?

Second, young voters are unlikely to be impressed with the hoopla around the skills agenda as it currently exists. Even skilled workers do not have jobs today. Our 3000 engineering institutes churn out 1.5 million graduates every year, many of dubious quality. Around one half waste the skills acquired as no jobs exist. Jobs can only be created over time. During the interim a “holding strategy” is needed.

The skills agenda is a copy of the “holding strategy” in developed countries, where kids without jobs can continue studying at state expense. This is extremely wasteful. Far better, in the Indian context, to incentivize kids early to opt for learning-on-the-job. The traditional system of learning under an “Ustad” (mentor) can be kick started by publicly funding 5 million long term-2 to 3 years- apprenticeships.

Business would welcome the move for two reasons. First, public funding dilutes the cost of training a low-skilled, young employee, who could leave after her apprenticeship. Second, businesses get to train employee in the skill-set per their specific requirement. They are far better placed to impart job related skills than vocational schools, established under traditional, technical training programs, at high cost, but no direct linkage to jobs.

For employee the on-the-job-training is a costless opportunity to network and to add skills with an eye to the future.

Clearly, there are downsides to this proposal. Employment in the formal, private sector is shallow at only 13 million. Apprenticeships in the suggested volumes just cannot be absorbed in the formal sector. In the non-formal sector, unfair capture of benefits by family members of the business owner is a possibility. But competitive grant of apprenticeships can overcome this problem. Also the scheme does not come cheap and could cost 1% of GDP or 5% of the government’s budget.

But just as clearly there are upsides. The political benefits are obvious: 15 million young voters and 50 million satisfied family members, spread across India, all of whom have benefited directly from the scheme by 2019 (next general elections).

More substantively, publicly funded apprenticeships can democratize access to non-formal private sector jobs by encouraging the entry of other than family members. The public subsidy for financing the learning curve can incentivize the hiring of deserving but un-networked and financially insecure, young workers.

The incremental fiscal burden, whilst not insignificant, is easily absorbed by rationalising the wasteful, legacy, central sector schemes spawned by the erstwhile Planning Commission which amount to more than 4% of the GDP. Also funding apprenticeships is one way of increasing our miserably low allocation of public resources for education.

The hardest thing in public resource allocation is to quantify tradeoffs. But helping a young worker get hands-on experience, as a first step towards a real job, is surely pretty high up as a national priority.

It is unlikely that the national coalition in Afghanistan, which the US has stitched together, will last. More likely, the Unity Government provides a convenient cover of artificially generated “peace” allowing the US to withdraw, with “honour”, from the “graveyard of invaders”.

Once it leaves, the US shall make all efforts to secure a working relationship between the Taliban and the Afghan Unity Government. The US has already started distinguishing between the palatable, if misguided, Taliban, with whom business is possible and the utterly untouchable Al Qaida.

The new Afghan President, Ashraf Ghani seems comfortable with cutting a deal with the Taliban to include them too, in the fullness of time, in the power sharing structure. This approach also fits well with the traditional “big tent” approach of the US which also includes decentralizing power and thereby enhancing inclusion of hitherto marginalized segments. This option is worth a try, but is likely to fail just as surely, as the existing Unity Government.

Mr. Ghani is a knowledgeable, well-meaning and committed, if somewhat unbending, politician-international bureaucrat-academic. His main problem will be similar to what Manmohan Singh faced in India. How does a personally honest leader turn a blind eye to massive corruption and yet retain control over the government?

Mr. Ghani says his first priority will be to make it difficult to be corrupt by improving governance systems. The conundrum is that “power sharing”, almost by definition, means allowing warlords a long rope. Manmohan Singh called it the “dharma of coalition politics”. Once executive control is loosened to avoid the personal association of the leader with the expectedly bad decisions of the warlords, stopping the system from unravelling is tough.

In his last political assignment (2002 to 2004) Mr. Ghani was Finance Minister in Afghanistan and was very successful in introducing some order and economic sense into governance. The parallels are ominous. Mr. Singh too was outstanding as Finance Minister in India before he got the top job. It doesn’t end there. Like Manmohan Singh in 1999, Ashraf Ghani lost his first election in 2009. The question then is: will Mr. Ghani be Afghanistan’s Manmohan Singh; a good man heading a bad outfit? Only time can tell.

For India, the current situation is impossible. There is little to distinguish the Pashtun dominated Taliban from Pakistan’s military de-facto rulers. This is why, traditionally, India cozied up, during the anti-Soviet war in Afghanistan (1980s), to the “Northern Alliance” comprising the Hazara, who are determinedly opposed to Pashtun rule; the Tajiks who are today represented by Abdullah Abdullah, the number two leader in the Unity Government and Abdul Rashid Dostum, the indomitable Uzbek leader- who is currently allied with the Pashtun, President-Ashraf Ghani.

Any talk of an Afghan government, propped up by the Taliban, cannot be music to either India’s ears or acceptable to Abdullah Abdullah. This is especially so because China does business with Pakistan quite happily and is unlikely to have any qualms about doing the same with the Taliban. In this calculus any gain for the Taliban, is a gain for Pakistan and for China and a loss for India.

In the shadows is Putin’s Great Bear which is constantly sniffing about for a pot of honey in the great game. India and the Soviets have a long association of friendship which can become the basis for a coalition of the “underdogs” in Afghanistan. India is also friends with Iran, which it uses to trade with Afghanistan. The Russia, Iran, India (RII) axis will become India’s fallback option if the US continues to duck its responsibilities in South Asia. The result will be the “RII axis” playing “spoilers’ with consequential instability and strife in Afghanistan.

The silver lining is that India’s PM Modi has already signaled a preference for a more positive strategy of alignment with the set of countries which represent the shared ideals of democracy, markets and private sector led equitable growth. This approach advocates caution and restraint in committing our scarce resources to secure our near-abroad, whilst we still face enormous challenges of dealing with domestic infrastructure and poverty.

PM Modi stressed during his recent US visit that there can be no “good terror (read Taliban) and bad terror (read IS and Al Qaida). The networks of terror and the resources available to them are fungible and transmute constantly to escape identification. In simple language, a Leopard cannot change its spots. The only option is to isolate and confine it once it turns man eater.

What is unknown is whether President Obama has his ears tuned to South Asia or will the IS and the Middle East pre-occupations distract him completely. Will he be forced to soften his currently anti-Sunni terror stance by turning a blind eye to the Sunni-Taliban in Afghanistan? Great powers have to choose their battles and prioritise across options.

If the choice is between completely browning-off Saudi Arabia and its cohort of Sunni Middle Eastern countries by pursuing Sunni-Terror doggedly, on the one hand and worrying about how this approach could impact India’s interest, we know which way he will jump; and who can blame him for that.

If India is actually part of the “big boys club” we must mobilize pressure from constituencies who have similar interests in containing terror to force the US to not “step off the plate”. If this fails, as it probably shall, the option is to build a coalition against terror with China, which is similarly affected by it. Testing times loom for India’s diplomats.

“Mujra”, the traditional PakIndia dance of seduction honed in glittering Lahore, immortalized by the ever beautiful, dusky Rekha in Umrao Jan, a classic film by our very own desi, aristocrat, designer Muzaffar Ali. Mujra is a dance of deception. The idea is for the danseuse to so mesmerize the viewers, that their head gets delinked from their heart and money slips through their loose fingers, like a snake escaping from fire.

All Finance Ministers have to be expert Mujra dancers. This will not be difficult for Arun Jaitley. First, he is a lawyer and those of his ilk are masters of deception. They apply the art of “need to know” whilst arguing in court. The need being to win the case of course. Second, Jaitley is a Panjabi. Amritsar, just an hour away from Lahore, rejected him for Patiala Royalty. But all Panjabis, on both sides of the border, know that when Royalty comes calling, others have to step aside.

Finance Ministers stamp their personalities on the speech they make on budget day in Parliament. Only the Mujra of the speech is different. The budget proposals have remained much the same since the Union Jack made way for our Tiranga in “our tryst with destiny”.

Manmohan Singh radiated “good intentions” and technical competence but was as dry as the Gobi desert

Yashwant Sinha, a babu, was all technical arguments and feigned “savoir faire”, as babus are when they stop being babus. Technically correct, but forgettable.

Chidambaram was Tamilian guile and sophistication coupled with brains sharper than a pair of “Shun” knives. But off-putting with his so very deliberate speech, which seemed consciously slowed, to enable the rest of the World to catch up with him.

Jaitley is different. In his latest avatar he is a cuddly as a Panda and larger now than a Sumo wrestler. But his personality radiates from his heart, which is as solidly Panjabi, as Amritsari Fish. His style is argumentative erudition bordering on the pedantic and mildly adversarial. He needs to watch that. Budget session is all about consensus, not contest.

But don’t be fooled by the style, the special smile, the sensuous, sliding look through the sides of the eye or the fluttering hands of the Mujra dancer. Look past the flashing diamonds on display. Look closely at the core service being offered and then and only then, make up your mind to loosen your purse.

Here are sevencore indicators to signal whether or not the Finance Minister is serving you well.

First, has be budgeted for a decrease or an increase of the Fiscal Deficit over the FY 2013-14 budget? Forget the 2014-15 interim budget presented by the UPA it was worse than Mujra. It was pure American “smoke and mirrors” designed to set impossible benchmarks for the next government, which UPA was sure would not be them.

The Fiscal Deficit in India is the difference between the total income of the government plus recoveries of loans and what it intends to spend, loan or gift over the next year. It is financed by borrowing at between 8 to 9% per annum. If it is being spent on the salary of an absent policeman or a sleeping babu, there is no way the government can get a matching “economic return” on that amount. So be very wary if the Fiscal Deficit is increasing in nominal terms over 2013-14. If it remains at the same “nominal “level you are winning because inflation has eaten away 8% of last years value. The Fiscal Deficit in 2013-14 was (hold your breath) Rs 5,24,530 crores or Rs 5,254 billion.

Do not be fooled by sops like a reduction in the excise duty for automobiles or enhanced allowance for setting off EMIs against Income Tax on loans taken for buying property. Do not rejoice even if the Income Tax Free limit is raised. Inflation can eat away these “notional” gains faster than water flows through Delhi’s clogged drains.

If you are not a senior or a super-senior citizen and earn Rs 600,000 a year pre-tax, an 8% inflation eats away Rs 48,000/- of your income. Compare this with “Mujra” gains FMs tend to give:

A 5% point reduction on the excise duty for a car worth Rs 600,000 comes to only Rs 6,000 per year over the five year life of the car.

The FM would need to raise the “free of income tax” limit from Rs 200,000 to Rs 300,000 and similarly raise the upper limit of the band in which you pay Income Tax at 10% above the free limit, from Rs 500,000 to Rs 600,000, just to neutralise the likely impact of inflation on your purchasing power. A change in Income Tax rates on this scale is very unlikely to happen.

Of course, if you are one of the 18 million lucky ones, working for the government, or if you are one of the estimated 10 million government pensioners, you need not bother about inflation. The government meekly and automatically adjusts babu salaries (including allowances) and pensions, twice a year, for inflation, which ironically, is caused by the loose fiscal policies; inefficient expenditure decisions and corruption within the government.

If you are not a babu and still under the age of 28, try and become a babu to get the “life-long” immunity from inflation. It’s a one-shot vaccination. If you have crossed that age limit, your only option is to not spend/save at least 8% of your monthly income because you will need it later in the year to cope with rising prices.

This blog intends to discuss one “citizen budget indicator” a day till July 9, 2014 so watch this “Mujra” space closely.